High-Frequency Trading and Latency Arbitrage › Key Parameters

Michael BrenndoerferJanuary 1, 20263 min read
Quantitative FinanceAll chapters
Part 12 of 15Market Making and High-Frequency Trading
Chapter 66High-Frequency Trading and Latency Arbitrage › Key Parameters
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The key parameters for speed competition analysis are:

  • latencies_ms: List of competitor latencies (milliseconds), determining relative speed advantages and establishing the competitive hierarchy.
  • total_opportunity_bps: Total arbitrage opportunity per event (basis points), representing the value to be captured and divided among competitors.
  • market_adjustment_ms: Time for market to fully adjust prices (milliseconds), defining the total window of opportunity during which profits can be captured.
  • profit_shares: Fraction of opportunity assigned to each competitor (0 to 1) by the model's interval-allocation rule.
Out[16]:
Visualization
Bar chart of modeled profit in basis points for five HFT firms, increasing from 0.04 for the fastest firm to 0.40 for the slowest because the model assigns each firm the interval before the next arrival.
Profit allocation among five HFT competitors under the simulation's interval rule. Each bar represents the time between a firm's arrival and the next arrival, with the final firm receiving the residual interval before full market adjustment. Because that final interval is widest here, the slowest firm receives the largest modeled share.
Line chart showing the fastest firm's modeled profit rising linearly from zero to 0.2 basis points over the first millisecond of speed advantage, then remaining flat through two milliseconds.
Modeled value of the fastest firm's lead over the second-fastest competitor. Profit rises linearly to 0.2 basis points as the lead widens from zero to one millisecond, then plateaus because the next competitor in the supplied latency list becomes the binding arrival.

The right panel shows how the fastest firm's profit increases with their speed advantage. The relationship is roughly linear: each additional millisecond of speed advantage translates to approximately 0.2 basis points of additional profit per event. This quantifies the economic value of speed improvements and helps firms decide how much to invest in infrastructure.